University

12/15/2010

Is "pay for performance" innovative? Aristotle says no.

The problem with being “innovative” is that somebody’s usually done it before.

This winter the city of Quincy, Massachusetts, will be expanding a pilot program that introduces “pay for performance” to the companies it hires to plow city streets. Instead of paying by the hours worked, the new approach pays them by the amount of snow they plow. Seems simple, right?

It should be, but “pay for performance” initiatives tend to hit a political firestorm these days (which is why the way Quincy, Mass., plows snow is in the news at all).

Attempts to re-imagine the way we compensate employees are almost automatically controversial: large sections of the country think that “pay for performance” and “privatize” (another element of the Quincy plan) are ways to save money by squeezing workers and offering worse service … and they’re often right. Indiana recently tried privatizing its Medicaid and welfare systems – and the results were so disastrous that even that state’s conservative Republican governor decided to go back to paying unionized government workers to handle caseloads.

And yet … doesn’t it seem like the Quincy snow plowing plan is a good one? How can you argue with it?

Paying for the amount of snow plowed, rather than the hours worked, has indeed rewarded efficiency and been a better measure of effectiveness. There’s likewise no question that salespeople sell more when they’re incentivized by commissions (pay for performance) and that some (though not all) charter schools do better than some (though not all) public schools … which is privatization.

So privatization and pay for performance are bad things, except when they’re good things. Wouldn’t it be nice if we could tell which way they’ll go in advance?

Can we develop an approach that will enable us to determine when they’re an improvement, rather than a disaster waiting to happen, ahead of time?

I think we can. It’s based, oddly enough, on the work of bioethicist and philosopher Leon Kass.

Asking the increasingly crucial question “when is the application of biotechnology to human beings appropriate, and when is it wrong,” Kass developed the following approach:

A biotech intervention is moral when it increases our capacity for human striving, and it is immoral when it reduces our need to strive.

This is based on the Aristotelian notion of happiness – that we are most happy when we are striving at our capacities towards a meaningful goal. Things that help us do that, such as curing heart disease or re-attaching severed limbs, are moral. Things that reduce our need to strive, such as pills that make us “happy” or that build muscle without exercise, are not. (Pills that increase the effectiveness of exercise, on the other hand, are okay)

This is not a universally accepted standard for biotechnology – I’m not even sure I embrace it wholly, although I think it’s the best approach I’ve yet seen. But I think it fits perfectly for the issue of when to privatize and offer pay for performance, and when not to.

Pay for performance is a good thing when it increases the capacity of the worker to find better ways to do their job. Pay for performance and privatization are bad things when they reduce the incentive to excel.

The Quincy approach to snow plowing clearly rewards innovation and quality: the better you are at plowing snow, the more you earn and the less overhead you spend. That’s better than a system which pays by the hour, however well you do.

On the other hand, Indiana’s experiment with privatization failed precisely because it rewarded people on the basis of how many people were “processed” by the system – not whether their cases were adjudicated fairly or accurately. A “pay for performance” approach, which needs an easily quantifiable metric, not only doesn’t encourage a quality response to a complex job, it discourages it.

The same thing is happening with “pay for performance” in education. The only thing you can measure that way are test scores … so you pay teachers for their students test results. That means anything not covered on the test is not incentivized. It doesn’t matter if you reach a student in a meaningful way, or create a love of a subject that lasts a lifetime: all that matters is that the scores go up. The scope of teachers’ mission and devotion to a full education is reduced, not enhanced.

If the Leon Kass approach is right, then our nation’s debate about privatization and pay-for-performance is exactly backwards: people are claiming that pay for performance and privatizations ARE THEMSELVES innovations. They’re not. Sometimes, however, they do make innovation possible.

In those cases, and only those cases, they should be embraced as a great solution. The rest of the time they should be taken off the table. Where there’s no clear indication that they would increase the capacity of workers to do better at their jobs, pay for performance is a smoke screen – a way to talk about efficiency and innovation without really looking at either.